Tax-extender legislation faces long road to approval

Rum-rebate program attacked as ‘special interest’ victory; U.S. House could scale back or kill U.S. Senate plan

While Puerto Rico's top elected officials celebrated last week's approval by the U.S. Senate Finance Committee of tax-extender legislation worth more than $200 million annually for the island, there is still a long road, and significant obstacles, to final approval.

The day after passage, the rum-rebate program—which has delivered hundreds of millions of dollars annually to Puerto Rico and the neighboring U.S. Virgin Islands— was blasted in a front-page Washington Post story as an example of how special interests won out over an attempt at reform in the Senate panel's mark up of the Family & Business Tax Cut Certainty Act of 2012.

Congress is in recess for the next five weeks, so the full Senate won't take up the legislation until some point in September, according to several reports. In addition, the U.S. House is writing up its own plan with key members opposed to the Senate version vowing to either scale it back or kill it outright.

The expected tug-of-war between the two chambers is leading many Washington, D.C. observers to predict the tax-extenders legislation won't be approved until the lame-duck session of Congress ends after the November election.

The bill approved last week extends important tax and funding programs for Puerto Rico through 2013. One proposal increases the amount of excise taxes on rum covered over to Puerto Rico and the USVI to $13.25 per proof gallon, from $10.50 per proof gallon, through 2013. The increase is worth about $65 million a year, according to new government estimates.

Another lowers the domestic manufacturing rebate to 32% from 35% for U.S.-based manufacturers operating on the island. The intent of this legislation is to keep Puerto Rico on a level playing field, tax-wise, with the rest of the U.S. for domestic manufacturers operating on the island. The Congressional Joint Committee on Taxation estimates the benefit would be worth $312 million over two years for the companies, but the U.S. Treasury Department places the benefit at about $160 million.

A third item extends the Vow to Hire Heroes tax credit through December 2013. This program grants tax credits to companies that hire unemployed people. The Puerto Rico Treasury Department offers the program through the local tax system and gets reimbursed by the federal government. According to the U.S. Census Bureau, there are more than 12,000 unemployed veterans in Puerto Rico.

"This positive vote for Puerto Rico took place after several months of close collaboration between Resident Commissioner Pedro Pierluisi, the Puerto Rico Federal Affairs Administration and myself to assure the Senate supports these tax provisions that represent hundreds of millions of dollars to our economy," Gov. Luis Fortuño said. "We are thankful for the effort of our [U.S.] Senate allies, who recognize the importance of approving these tax extenders."

Yet, the tax extenders are being criticized stateside as the kind of special-interest giveaways that Congress needs to tackle to reign in federal spending. "Members of the Senate Finance Committee congratulated themselves for agreeing to jettison 20 of the perks….but their failure to weed out dozens more pet provisions clouded prospects for a far-reaching simplification of the nation's tax laws advocated by President Obama, GOP challenger Mitt Romney and congressional leaders in both parties," the Washington Post wrote.

The rum rebate is also under attack because the USVI and Puerto Rico are granting incentives to their rum producers using program funds that give them an unfair advantage and will squeeze other Caribbean rummakers out of the U.S. market, with some nations threatening to file a World Trade Organization complaint. (See CB Aug. 2.)

To address this issue, Pierluisi has advocated legislation that would cap the amount of rum-rebate funds that can be granted to producers. However, an attempt by U.S. Sens. Bob Menéndez, D-N.J., and Jeff Bingaman, D-N.M., to insert a provision to do that in the Family & Business Tax Cut Certainty Act of 2012 failed.

Menéndez pledged to continue pressing the issue. "The status quo is simply unacceptable, and it is happening on our watch. We have to find a solution to this issue to make the cover-over program work for the people of the territories, which it was intended to do," he said.